Midnight mayhem: US budget battle sends stocks into plummet

Trader works on the floor of the New York Stock Exchange (Reuters/Brendan McDermid) / Reuters

Global stocks have slid just hours before the US government shutdown deadline expires at midnight. Market sentiment has weakened as US lawmakers have still not come to a consensus on their spending bill for the next fiscal year, which starts on Oct 1.

Concern over a US government shutdown spooked European and Asian
floors. In morning trading, the EURO STOXX 50 and Germany’s DAX
dropped 1.10 percent, and France’s CAC Index fell 1.12 percent.

Asian markets retreated on the fear the US wouldn’t resolve its
budget debate before the deadline, and all indexes closed down.
The Hong Kong Hang Seng was down 1.30 percent, Japan’s Nikkei 225
closed 2.06 percent lower.

The market decline marks a major turnaround from last week’s
robust growth, as investors were welcoming the news that the US
chose to stick to their monthly $85 billion injection.

The key stumbling block on the way to a new spending bill for the
US is the debate over President Obama’s healthcare program dubbed
Obamacare. Republicans have promised to keep fighting to
slash funding, which is expected to cost $1.76 trillion between
2012 and 2021, instead of extending the debt-ceiling.

In remarks made by Obama Monday evening the President
struck a defiant note on the healthcare law.

"An important part of the Affordable Care Act takes effect
tomorrow, no matter what Congress decides to do today. The
Affordable Care Act is moving forward. That funding is already in
place. You can't shut it down."

In another pointed remark aimed at Republicans tying Obamacare to
the government shutdown the President essentially accused
lawmakers of political blackmail.

"You don't get to extract a ransom for doing your job, for
doing what you're supposed to be doing anyway, or just because
there's a law there that you don't like."

The Democrat-controlled Senate has insisted it would not pass a
bill that alters the health care law and the White House has said
President Obama would veto such a bill.

The Senate meets at 2:00pm EST in Washington DC, just ten hours
before the deadline.

The political stand-off could have serious economic consequences
for the US and the global economy, as both uneasily straddle the
recession line.

“We know it would have a profound destabilizing effect on the
entire economy — on the world economy — because America is the
bedrock of world investment,” President Obama said Friday in
a warning to Congress, adding Congress shouldn’t ‘fool’ with the
world’s reserve currency and foundation for capital markets.

FACT: If House Republicans force a government #shutdown,
it could cost our economy $10 billion per week.

A short-term shutdown could likely be sustained, as long as
lawmakers scramble together and clinch a last-minute short-term
budget deal.

Ron Paul, a member of the Republican party, is confident the
economy won’t collapse as a result of a shut down.

“Despite all the hand-wringing heard in DC, a short-term
government shut down (which doesn’t actually shut down the
government) will not cause the country to collapse,” he wrote
on his blog on Monday.

Moody’s expects the US will avoid a shutdown and increase the
debt limit, because defaulting would “create a global
financial problem” with far greater consequences than a
higher spending limit, Moody’s said in a report published
last Tuesday.

In the event of a shutdown, 800,000 federal workers won’t go to
work on Tuesday, but many services will still remain operational-
the postal service, police and airport security, border and coast
guard will remain on duty, garbage will be collected, and most
courts will stay open. Cities will dip into their local budgets
to keep essential services operational.

The US has partially shut down the government 17 times since
1977, ranging from hours to a couple of days.

The government shut down for 21 days from December 1996 to
January 1997 under the Clinton administration cost an estimated
$2 billion in nominal dollars, according to the US Office
Management and Budget.

A government shutdown seems likely, as officials have yet to
agree to raise the ‘debt ceiling’ or reach an alternative budget
option after Treasury Secretary Jacob Lew (link) warned the US
would run out of money by October 17 and have less than $30
billion cash in hand.

If it drags on longer than a couple of weeks, and pushes closer
to the October 17 deadline set by Lew, then the ‘what if the US
defaults’ dialogue will begin.

The US most recently raised the debt ceiling to $16.699 trillion
in May 2013, keeping the economy a safe distance from the
so-called ‘fiscal cliff’.

As of September 26, the US Treasury reported its federal debt at
$16,699,396,000,000.00 in their daily treasury statementsituating spending about $25
billion shy of the legal limit of $16,699,421,095,673.60.